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Section 721(a)(21) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (“Dodd-Frank Act”) permits the Secretary of the Treasury to issue a determination exempting
foreign exchange (“FX”) swaps and FX forwards from the definition of a “swap” under the Commodity
Exchange Act.1 As participants in the FX swaps, FX forwards, and swaps markets, Investment
Company Institute2 members have a strong interest in ensuring that these markets are suitably
regulated to maintain highly competitive, transparent, fair, and efficient operations. Developing the
appropriate regulatory framework and avoiding unintended consequences requires thoughtful, detailed,
and comprehensive analysis of rulemaking proposals.
Given the largely incomplete framework for regulating swaps and the absence of key
information that will come out of the future rulemaking process, we are not commenting at this time
on whether FX swaps and FX forwards should be excluded from the definition of a “swap.”
Nonetheless, we recommend that the Treasury clarify that: (1) “FX Spot” transactions, or foreign
exchange transactions with a short settlement cycle (T+6 or less), are not included within the
definition of a “swap” as they are non-speculative transactions entered into to effect international trades
and the repatriation of foreign dividends and (2) the term “foreign exchange forwards” includes non-
deliverable FX forwards.
1
See Section 1a(47)(E) of the Commodity Exchange Act, as amended by the Dodd-Frank Act.
2
The Investment Company Institute is the national association of U.S. investment companies, including mutual funds,
closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs) (collectively “funds”). ICI seeks to
encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds,
their shareholders, directors, and advisers. Members of ICI manage total assets of $12.05 trillion and serve over 90 million
shareholders.
Ms. Mary J. Miller
November 29, 2010
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We recommend that the Treasury clarify that FX Spot transactions are not ‘‘swaps’’ under the
Dodd-Frank Act.3 FX Spot transactions are FX transactions with a relatively short settlement cycle
(i.e., T+6 or less) that are typically entered into to hedge currency risk presented in the settlement of
non-U.S. dollar-denominated security purchases and sales, dividend payments, and other similar
transactions. The short-dated nature of FX Spot transactions presents little opportunity for
speculation or leveraged returns, and is unlikely to raise risks that may be associated with longer-dated
swaps. In addition, from a practical perspective, the collateralization of FX Spot transactions is not
market practice and would present significant challenges in terms of the frequency of valuations,
collateral transfers, and collateral returns, with such challenges not commensurate with the risk arising
from such product.
Under Title VII of the Dodd-Frank Act, the term “foreign exchange forwards” means a
transaction that solely involves the exchange of two different currencies on a specific future date at a
fixed rate agreed upon on the inception of the contract covering the exchange.4 This definition could
be interpreted to include deliverable trades only because it mentions the “exchange” of two different
currencies. Given this interpretation, the definition of “foreign exchange forwards” would exclude non-
deliverable FX forwards, which are cash settled in just one currency and do not involve the exchange of
underlying currencies. As a result, even if the Treasury exempts FX forwards from the definition of a
“swap,” non-deliverable FX forwards would continue to be included under the scope of Title VII of the
Dodd-Frank Act. If the Treasury determines to exempt FX swaps and FX forwards from the definition
of a “swap,” we recommend that it clarify that the term “foreign exchange forwards” includes both
deliverable and non-deliverable FX forwards.5 Failure to do so could create confusion for market
participants regarding the treatment of the two types of FX forwards. Further, we believe that non-
deliverable FX forwards present less risk, because the principal amounts are never exchanged, and
should not be treated differently from deliverable FX forwards.
* * * * *
If you have any questions on our comment letter, please feel free to contact me directly at (202)
3
We also have asked the CFTC to clarify that FX Spot transactions are not “swaps.” In the absence of such clarification, we
recommend that the Treasury explicitly exempt FX Spot transactions from the definition of a “swap.” See Letter from
Karrie McMillan, General Counsel, Investment Company Institute, to Elizabeth M. Murphy, Secretary, Securities and
Exchange Commission, and David A Stawick, Secretary, Commodity Futures Trading Commission, dated September 20,
2010.
4
See Section 1a(24) of the Commodity Exchange Act, as amended by the Dodd-Frank Act.
5
We recommend that the CFTC also issue guidance adopting this technical revision.
Ms. Mary J. Miller
November 29, 2010
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Sincerely,
Karrie McMillan
General Counsel